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EX-95 - EXHIBIT 95 - PEABODY ENERGY CORPbtu_20180331xex95.htm
EX-32.2 - EXHIBIT 32.2 - PEABODY ENERGY CORPbtu_20180331xex322.htm
EX-32.1 - EXHIBIT 32.1 - PEABODY ENERGY CORPbtu_20180331xex321.htm
EX-31.2 - EXHIBIT 31.2 - PEABODY ENERGY CORPbtu_20180331xex312.htm
EX-31.1 - EXHIBIT 31.1 - PEABODY ENERGY CORPbtu_20180331xex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-16463
____________________________________________
peabodylogoa11.jpg
PEABODY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-4004153
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
701 Market Street, St. Louis, Missouri
 
63101-1826
(Address of principal executive offices)
 
(Zip Code)
(314) 342-3400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filer þ
 
 
 
 
 
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
 
 
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No ¨
There were 125.5 million shares of the registrant’s common stock (par value of $0.01 per share) outstanding at May 4, 2018.




TABLE OF CONTENTS
 
Page
 
 




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Successor
Predecessor
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
(Dollars in millions, except per share data)
Revenues
 

 
Sales
$
1,269.1

$
1,081.4

Other revenues
193.6

244.8

Total revenues
1,462.7

1,326.2

Costs and expenses
 
 
Operating costs and expenses (exclusive of items shown separately below)
1,057.2

950.2

Depreciation, depletion and amortization
169.6

119.9

Asset retirement obligation expenses
12.3

14.6

Selling and administrative expenses
37.0

36.3

Other operating (income) loss:
 
 
Net gain on disposals
(30.6
)
(22.8
)
Asset impairment

30.5

Income from equity affiliates
(22.0
)
(15.0
)
Operating profit
239.2

212.5

Interest expense
36.3

32.9

Interest income
(7.2
)
(2.7
)
Net periodic benefit costs, excluding service cost
4.5

14.4

Reorganization items, net
(12.8
)
41.4

Income from continuing operations before income taxes
218.4

126.5

Income tax provision
10.1

2.2

Income from continuing operations, net of income taxes
208.3

124.3

Loss from discontinued operations, net of income taxes
(1.3
)
(4.1
)
Net income
207.0

120.2

Less: Series A Convertible Preferred Stock dividends
102.5


Less: Net (loss) income attributable to noncontrolling interests
(2.1
)
4.8

Net income attributable to common stockholders
$
106.6

$
115.4

 
 
 
Income from continuing operations:
 
 
Basic income per share
$
0.84

$
6.46

Diluted income per share
$
0.83

$
6.44

 
 
 
Net income attributable to common stockholders:
 
 
Basic income per share
$
0.83

$
6.24

Diluted income per share
$
0.82

$
6.21

 
 
 
Dividends declared per share
$
0.115

$

See accompanying notes to unaudited condensed consolidated financial statements.


1



PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Successor
Predecessor
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
(Dollars in millions)
Net income
$
207.0

$
120.2

Reclassification for realized losses on cash flow hedges (net of respective net tax provision of $0.0 and $9.1) included in net income

18.6

Postretirement plans and workers’ compensation obligations (net of respective net tax provision of $0.0 and $2.5)

4.4

Foreign currency translation adjustment
(0.8
)
5.5

Other comprehensive (loss) income, net of income taxes
(0.8
)
28.5

Comprehensive income
206.2

148.7

Less: Series A Convertible Preferred Stock dividends
102.5


Less: Net (loss) income attributable to noncontrolling interests
(2.1
)
4.8

Comprehensive income attributable to common stockholders
$
105.8

$
143.9


See accompanying notes to unaudited condensed consolidated financial statements.


2



PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
March 31, 2018
 
December 31, 2017
 
(Amounts in millions, except per share data)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,416.6

 
$
1,012.1

Restricted cash

 
40.1

Accounts receivable, net of allowance for doubtful accounts of $4.8 at March 31, 2018 and $4.6 at December 31, 2017
524.0

 
552.1

Inventories
265.5

 
291.3

Assets from coal trading activities, net
11.2

 
2.6

Collateral arrangements - current
109.1

 

Other current assets
251.1

 
291.8

Total current assets
2,577.5

 
2,190.0

Property, plant, equipment and mine development, net
5,008.0

 
5,111.9

Collateral arrangements

 
323.1

Investments and other assets
343.6

 
470.6

Deferred income taxes
85.5

 
85.6

Total assets
$
8,014.6

 
$
8,181.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
87.1

 
$
42.1

Liabilities from coal trading activities, net
8.8

 
11.7

Accounts payable and accrued expenses
1,050.6

 
1,191.1

Total current liabilities
1,146.5

 
1,244.9

Long-term debt, less current portion
1,368.1

 
1,418.7

Deferred income taxes
5.2

 
5.4

Asset retirement obligations
665.9

 
657.0

Accrued postretirement benefit costs
727.3

 
730.0

Other noncurrent liabilities
451.1

 
469.4

Total liabilities
4,364.1

 
4,525.4

Stockholders’ equity
 
 
 
Series A Convertible Preferred Stock — $0.01 per share par value; no shares authorized, issued or outstanding as of March 31, 2018 and 50.0 shares authorized, 30.0 shares issued and 13.5 shares outstanding as of December 31, 2017

 
576.0

Preferred Stock — $0.01 per share par value; 100.0 shares authorized, no shares issued or outstanding as of March 31, 2018 and 50.0 shares authorized, no shares issued or outstanding as of December 31, 2017

 

Series Common Stock — $0.01 per share par value; 50.0 shares authorized, no shares issued or outstanding as of March 31, 2018 or December 31, 2017

 

Common Stock — $0.01 per share par value; 450.0 shares authorized, 137.3 shares issued and 126.3 shares outstanding as of March 31, 2018 and 111.8 shares issued and 105.2 shares outstanding as of December 31, 2017
1.4

 
1.0

Additional paid-in capital
3,276.9

 
2,590.3

Treasury stock, at cost — 10.2 and 5.8 common shares as of March 31, 2018 and December 31, 2017
(351.4
)
 
(175.9
)
Retained earnings
682.3

 
613.6

Accumulated other comprehensive income
0.6

 
1.4

Peabody Energy Corporation stockholders’ equity
3,609.8

 
3,606.4

Noncontrolling interests
40.7

 
49.4

Total stockholders’ equity
3,650.5

 
3,655.8

Total liabilities and stockholders’ equity
$
8,014.6

 
$
8,181.2

See accompanying notes to unaudited condensed consolidated financial statements.


3



PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Successor
Predecessor
 
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
 
(Dollars in millions)
Cash Flows From Operating Activities
 
 
 
Net income
 
$
207.0

$
120.2

Loss from discontinued operations, net of income taxes
 
1.3

4.1

Income from continuing operations, net of income taxes
 
208.3

124.3

Adjustments to reconcile income from continuing operations, net of income taxes to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
 
169.6

119.9

Noncash interest expense, net
 
3.1

0.5

Deferred income taxes
 
0.7

1.7

Noncash share-based compensation
 
8.1

1.9

Asset impairment
 

30.5

Net gain on disposals
 
(30.6
)
(22.8
)
Income from equity affiliates
 
(22.0
)
(15.0
)
Foreign currency option contracts
 
2.0


Reclassification from other comprehensive earnings for terminated hedge contracts
 

27.6

Noncash reorganization items, net
 
(12.8
)
10.0

Changes in current assets and liabilities:
 
 
 
Accounts receivable
 
117.1

159.3

Inventories
 
25.2

(47.2
)
Net assets from coal trading activities
 
(11.6
)
(0.5
)
Other current assets
 
(25.6
)
0.1

Accounts payable and accrued expenses
 
(42.5
)
(64.9
)
Collateral arrangements
 
214.0

(66.4
)
Asset retirement obligations
 
7.0

10.2

Workers’ compensation obligations
 
0.3

(3.1
)
Postretirement benefit obligations
 
(2.6
)
0.8

Pension obligations
 
(32.3
)
5.4

Other, net
 
5.3

(8.0
)
Net cash provided by continuing operations
 
580.7

264.3

Net cash used in discontinued operations
 
(1.0
)
(8.2
)
Net cash provided by operating activities
 
579.7

256.1

Cash Flows From Investing Activities
 
 
 
Additions to property, plant, equipment and mine development
 
(53.7
)
(32.8
)
Changes in accrued expenses related to capital expenditures
 
(4.9
)
(1.4
)
Federal coal lease expenditures
 
(0.5
)
(0.5
)
Proceeds from disposal of assets, net of receivables
 
23.0

24.3

Contributions to joint ventures
 
(123.5
)
(95.4
)
Distributions from joint ventures
 
120.7

90.5

Advances to related parties
 
(2.0
)
(0.4
)
Repayments of loans from related parties
 
35.3

31.1

Other, net
 
(0.8
)
(0.3
)
Net cash (used in) provided by investing activities
 
(6.4
)
15.1



4



PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
 
 
Successor
Predecessor
 
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
 
(Dollars in millions)
Cash Flows From Financing Activities
 
 
 
Proceeds from long-term debt
 

1,000.0

Repayments of long-term debt
 
(8.2
)
(2.1
)
Payment of deferred financing costs
 

(45.4
)
Common stock repurchases
 
(175.5
)

Dividends paid
 
(15.0
)

Distributions to noncontrolling interests
 
(6.6
)
(0.1
)
Other, net
 
0.2

(0.1
)
Net cash (used in) provided by financing activities
 
(205.1
)
952.3

Net change in cash, cash equivalents and restricted cash
 
368.2

1,223.5

Cash, cash equivalents and restricted cash at beginning of period (1)
 
1,070.2

941.2

Cash, cash equivalents and restricted cash at end of period (2)
 
$
1,438.4

$
2,164.7

 
 
 
 
 
 
 
 
(1) The following table provides a reconciliation of “Cash, cash equivalents and restricted cash at beginning of period”:
 
Cash and cash equivalents
 
$
1,012.1

 
Restricted cash
 
40.1

 
Restricted cash included in investments and other assets
 
18.0

 
Cash, cash equivalents and restricted cash at beginning of period
 
$
1,070.2

 
 
 
 
 
(2) The following table provides a reconciliation of “Cash, cash equivalents and restricted cash at end of period”:
 
Cash and cash equivalents
 
$
1,416.6

 
Restricted cash included in investments and other assets
 
21.8

 
Cash, cash equivalents and restricted cash at end of period
 
$
1,438.4

 


See accompanying notes to unaudited condensed consolidated financial statements.


5



PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 
Peabody Energy Corporation Stockholders’ Equity
 
 
 
 
 
Series A Convertible Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
(Dollars in millions)
December 31, 2017
$
576.0

 
$
1.0

 
$
2,590.3

 
$
(175.9
)
 
$
613.6

 
$
1.4

 
$
49.4

 
$
3,655.8

Impact of adoption of Accounting Standards Update 2014-09








(22.5
)





(22.5
)
Net income (loss)








209.1




(2.1
)

207.0

Dividends declared




0.4




(15.4
)





(15.0
)
Foreign currency translation adjustment










(0.8
)



(0.8
)
Series A Convertible Preferred Stock conversions
(576.0
)

0.4


678.1




(102.5
)






Share-based compensation for equity-classified awards




8.1










8.1

Common stock repurchases






(175.5
)







(175.5
)
Distributions to noncontrolling interests












(6.6
)

(6.6
)
March 31, 2018
$


$
1.4


$
3,276.9


$
(351.4
)

$
682.3


$
0.6


$
40.7


$
3,650.5


See accompanying notes to unaudited condensed consolidated financial statements.



6



PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated financial statements include the accounts of Peabody Energy Corporation (PEC) and its consolidated subsidiaries and affiliates (along with PEC, the Company or Peabody). Interests in subsidiaries controlled by the Company are consolidated with any outside stockholder interests reflected as noncontrolling interests, except when the Company has an undivided interest in an unincorporated joint venture. In those cases, the Company includes its proportionate share in the assets, liabilities, revenues and expenses of the jointly controlled entities within each applicable line item of the unaudited condensed consolidated financial statements. All intercompany transactions, profits and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation and certain prior year amounts have been reclassified for consistency with the current period presentation. Balance sheet information presented herein as of December 31, 2017 has been derived from the Company’s audited consolidated balance sheet at that date. The Company’s results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2018.
Plan of Reorganization and Emergence from Chapter 11 Cases
On April 13, 2016, PEC and a majority of its wholly owned domestic subsidiaries, as well as one international subsidiary in Gibraltar (collectively with PEC, the Debtors), filed voluntary petitions (the Bankruptcy Petitions) under Chapter 11 of Title 11 of the U.S. Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Eastern District of Missouri (the Bankruptcy Court). The Debtors’ Chapter 11 cases (the Chapter 11 Cases) were jointly administered under the caption In re Peabody Energy Corporation, et al., Case No. 16-42529.
For periods subsequent to filing the Bankruptcy Petitions, the Company applied the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852, “Reorganizations”, in preparing its consolidated financial statements. ASC 852 requires that financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred in the bankruptcy proceedings were recorded in “Reorganization items, net” in the unaudited condensed consolidated statements of operations. “Reorganization items, net” for the three months ended March 31, 2018 consisted of settlement gains of $12.8 million related to certain unsecured claims. For the three months ended March 31, 2017, “Reorganization items, net” consisted of professional fees of $42.5 million, accounts payable settlement gains of $0.7 million and interest income of $0.4 million. Professional fees are only those that were directly related to the reorganization including, but not limited to, fees associated with advisors to the Debtors, the unsecured creditors' committee and certain other secured and unsecured creditors. During the three months ended March 31, 2017, $31.4 million of cash payments were made for "Reorganization items, net".
On March 17, 2017, the Bankruptcy Court entered an order, Docket No. 2763 (the Confirmation Order), confirming the Debtors’ Second Amended Joint Plan of Reorganization of Debtors and Debtors in Possession (as further modified, the Plan). On April 3, 2017 (the Effective Date), the Debtors satisfied the conditions to effectiveness set forth in the Plan, the Plan became effective in accordance with its terms and the Debtors emerged from the Chapter 11 Cases.
On the Effective Date, in accordance with ASC 852, the Company applied fresh start reporting which requires the Company to allocate its reorganization value to the fair value of assets and liabilities in conformity with the guidance for the acquisition method of accounting for business combinations. The Company was permitted to use fresh start reporting because (i) the holders of existing voting shares of the Predecessor (as defined below) company received less than 50% of the voting shares of the emerging entity upon reorganization and (ii) the reorganization value of the Company’s assets immediately prior to Plan confirmation was less than the total of all postpetition liabilities and allowed claims.


7


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Upon adoption of fresh start reporting, the Company became a new entity for financial reporting purposes, reflecting the Successor (as defined below) capital structure. As a result, a new accounting basis in the identifiable assets and liabilities assumed was established with no retained earnings or accumulated other comprehensive income (loss) for financial reporting purposes. The Company selected an accounting convenience date of April 1, 2017 for purposes of applying fresh start reporting as the activity between the convenience date and the Effective Date does not result in a material difference in the results. References to “Successor” in the financial statements and accompanying footnotes are in reference to reporting dates on or after April 2, 2017; references to “Predecessor” in the financial statements and accompanying footnotes are in reference to reporting dates through April 1, 2017 which includes the impact of the Plan provisions and the application of fresh start reporting. As such, the Company’s financial statements for the Successor will not be comparable in many respects to its financial statements for periods prior to the adoption of fresh start reporting and prior to the accounting for the effects of the Plan. For further information on the Plan and fresh start reporting, see Note 2. “Emergence from the Chapter 11 Cases and Fresh Start Reporting” in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
In connection with fresh start reporting, the Company made certain prospective accounting policy elections that impact the Successor periods presented herein. The Company now classifies the amortization associated with its asset retirement obligation assets within “Depreciation, depletion and amortization” in its consolidated statements of operations, rather than within “Asset retirement obligation expenses”, as in Predecessor periods. With respect to its accrued postretirement benefit and pension obligations, the Company now records amounts attributable to prior service cost and actuarial valuation changes, as applicable, currently in earnings rather than recording such amounts within accumulated other comprehensive income and amortizing to expense over applicable time periods.
(2)    Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented
Newly Adopted Accounting Standards
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method. The new standard provides a single principles-based, five-step model to be applied to all contracts with customers, which steps are to (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when each performance obligation is satisfied. The Company recognized the cumulative effect of initially applying ASU 2014-09 as an adjustment to the opening balance of retained earnings. Revenue previously recognized under contracts completed prior to January 1, 2018 was not impacted by adoption and comparative information has not been restated. The impact of the adoption of ASU 2014-09 is expected to be immaterial to the Company’s results of operations, financial condition, and cash flows on an ongoing basis.
The majority of the Company’s coal sales revenue will continue to be recognized as title and risk of loss transfer to the customer at mines and ports when coal is loaded to the transportation source, as further described in Note 3. “Revenue Recognition.” The impact of the adoption of ASU 2014-09 was limited to a long-term contract in which consideration related to the reimbursement of certain post-mining costs was recognized as costs were incurred, which differs in timing compared to the five-step model described above. The cumulative effects to the Company’s consolidated January 1, 2018 balance sheet were to reduce retained earnings for the amount of revenue that would have been deferred and to reduce long-term customer receivables, as noted in the table below:
 
Balance at
December 31, 2017
 
Adjustments due to ASU 2014-09
 
Balance at
January 1, 2018
 
(Dollars in millions)
ASSETS
 
 
 
 
 
Investments and other assets
$
470.6

 
$
(22.5
)
 
$
448.1

 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
 
Retained earnings
613.6

 
(22.5
)
 
591.1

ASU 2014-09 also requires entities to disclose sufficient qualitative and quantitative information to enable financial statement users to understand the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. Such disclosures are included in Note 3. “Revenue Recognition.”


8


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued ASU 2016-15 to amend the classification of certain cash receipts and cash payments in the statement of cash flows to reduce diversity in practice. The Company retrospectively adopted all the provisions of this new standard in the first quarter of 2018. The classification requirements under the new guidance are either consistent with the Company’s current practices or are not applicable to its activities, and as such, did not have a material impact on classification of cash receipts and cash payments in the Company’s unaudited condensed consolidated statements of cash flows.
Restricted Cash. In November 2016, the FASB issued ASU 2016-18, which reduces diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The Company retrospectively adopted all the provisions of this new accounting standard in the first quarter of 2018 and as a result of the new guidance, the Company will combine restricted cash with unrestricted cash and cash equivalents when reconciling the beginning and end of period balances on its statements of cash flows. The amendments also require a company to disclose information about the nature of the restrictions and amounts described as restricted cash and restricted cash equivalents. Such disclosures are included in Note 17. “Financial Instruments and Other Guarantees.” Further, as cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet, the Company reconciled these amounts to the total shown in the statement of cash flows in a tabular format within the Company’s unaudited condensed consolidated statements of cash flows.
Compensation - Retirement Benefits. In March 2017, the FASB issued ASU 2017-07, which requires employers that sponsor defined benefit pension and other postretirement plans to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income on a retrospective basis. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company adopted all the provisions of this new accounting standard in the first quarter of 2018. While adoption of this guidance did impact financial statement presentation, it did not materially impact the Company’s results of operations, financial condition, or cash flows. The retrospective impact to the unaudited condensed consolidated statement of operations was as follows:
 
Predecessor
 
Three Months Ended March 31, 2017
 
Before Application of Accounting Guidance
 
Adjustment
 
After Application of Accounting Guidance
 
(Dollars in millions)
Results of Operations Amounts
 
 
 
 
 
Operating costs and expenses
$
963.7

 
$
(13.5
)
 
$
950.2

Selling and administrative expenses
37.2

 
(0.9
)
 
36.3

Operating profit
198.1

 
14.4

 
212.5

Net periodic benefit costs, excluding service cost

 
14.4

 
14.4

Income from continuing operations before income taxes
126.5

 

 
126.5

Compensation - Stock Compensation. In May 2017, the FASB issued ASU 2017-09 to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company prospectively applied all the provisions of this new accounting standard on January 1, 2018 and there was no material impact to the Company’s financial statements.


9


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Standards Not Yet Implemented
Leases. In February 2016, the FASB issued ASU 2016-02, which will require a lessee to recognize on its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Additional qualitative disclosures along with specific quantitative disclosures will also be required. The new guidance will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (January 1, 2019 for the Company). In November 2017, the FASB voted to propose amendments to the new leases guidance to add two practical expedients. The proposed changes would allow entities to elect a simplified transition approach, and provide lessors with an option related to how lease and other related revenues are presented and disclosed. The Company is in the process of evaluating the impact of ASU 2016-02 and expects, through the addition of significant lease assets and lease liabilities to the consolidated balance sheet, ASU 2016-02 will have a material impact on the consolidated balance sheets (amount will be dependent on leases outstanding at adoption date), but is not expected to have a material impact on the consolidated statements of operations and comprehensive income (loss) of the Company.
Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13 related to the measurement of credit losses on financial instruments. The pronouncement replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses for financial assets not accounted for at fair value with gains and losses recognized through net income. This standard is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for the Company) and interim periods therein, with early adoption permitted for fiscal years, and interim periods therein, beginning after December 15, 2018. The Company is in the process of evaluating the impact that the adoption of this guidance will have on its results of operations, financial condition, cash flows and financial statement presentation.
Derivatives and Hedging. In August 2017, the FASB issued ASU 2017-12 to amend the hedge accounting rules to simplify the application of hedge accounting guidance and better align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. The new guidance will be effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for the Company) and interim periods therein, with early adoption permitted. The amendments to cash flow and net investment hedge relationships that exist on the date of adoption will be applied using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial condition, cash flows and financial statement presentation.
Leases - Land Easements. In January 2018, the FASB issued ASU 2018-01 to provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new leases requirements in Topic 842 to assess whether they meet the definition of a lease. The amendments in this update affect the amendments in ASU 2016-02. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. The Company is in the process of evaluating the impact that the adoption of this guidance will have on its results of operations, financial condition, cash flows and financial statement presentation.
(3)    Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606), which the Company adopted on January 1, 2018, using the modified retrospective approach. See Note 2. “Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented” for further discussion of the adoption, including the impact on the Company’s opening balance sheet.


10


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Sales
The majority of the Company’s revenue is derived from the sale of coal under a variety of long-term (those with initial terms of one year or longer and which often include price reopener and/or extension provisions), short-term (those with terms of less than one year) and spot agreements. The Company’s revenue from coal sales is realized and earned when risk of loss passes to the customer. Under the typical terms of the Company’s coal supply agreements, title and risk of loss transfer to the customer at the mine or port, where coal is loaded to the transportation source(s) that serves each of the Company’s mines. The Company incurs certain “add-on” taxes and fees on coal sales. Reported coal sales include taxes and fees charged by various federal and state governmental bodies and the freight charged on destination customer contracts.
The Company’s U.S. operating platform primarily sells thermal coal to electric utilities in the U.S. under long-term contracts, with a portion sold into the seaborne markets as conditions warrant. A significant portion of the coal production from the U.S. mining segments is sold under long-term supply agreements, and customers of those segments continue to pursue long-term sales agreements in recognition of the importance of reliability, service and predictable coal prices to their operations. The terms of coal supply agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of those agreements may vary in many respects, including price adjustment features, price reopener terms, coal quality requirements, quantity parameters, permitted sources of supply, treatment of environmental constraints, extension options, force majeure and termination and assignment provisions.
The Company's Australian operating platform is primarily export focused with customers spread across several countries, while a portion of the metallurgical and thermal coal is sold within Australia. Generally, revenues from individual countries vary year by year based on electricity and steel demand, the strength of the global economy, governmental policies and several other factors, including those specific to each country. A majority of these sales are executed through annual and multi-year international coal supply agreements that contain provisions requiring both parties to renegotiate pricing periodically. Industry commercial practice, and the Company’s typical practice, is to negotiate pricing for seaborne metallurgical coal contracts on a quarterly, spot or index basis and seaborne thermal coal contracts on an annual, spot or index basis. The portion of volume priced on a shorter-term basis and index linked basis has increased in recent years. In the case of periodically negotiated pricing, the Company may deliver coal under provisional pricing until a final agreed-upon price is determined. The resulting make-whole settlements are recognized when reasonably estimable.
Contract pricing is set forth on a per ton basis and revenue is generally recorded as the product of price and volume delivered. Many of the Company’s coal supply agreements contain provisions that permit the parties to adjust the contract price upward or downward at specified times. These contract prices may be adjusted based on inflation or deflation and/or changes in the factors affecting the cost of producing coal, such as taxes, fees, royalties and changes in the laws regulating the mining, production, sale or use of coal. In a limited number of contracts, failure of the parties to agree on a price under those provisions may allow either party to terminate the contract. The Company sometimes experiences a reduction in coal prices in new long-term coal supply agreements replacing some of its expiring contracts. Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the Company or the customer during the duration of specified events beyond the control of the affected party. Most of the coal supply agreements contain provisions requiring the Company to deliver coal meeting quality thresholds for certain characteristics such as Btu, sulfur content, ash content, grindability and ash fusion temperature. Failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts. Moreover, some of these agreements allow the Company’s customers to terminate their contracts in the event of changes in regulations affecting the industry that restrict the use or type of coal permissible at the customer’s plant or increase the price of coal beyond specified limits.
Other Revenues
"Other revenues" may include net revenues from coal trading activities as discussed in Note 7. “Coal Trading,” as well as coal sales revenues that were derived from the Company’s mining operations and sold through the Company’s coal trading business. Also included are revenues from customer contract-related payments, royalties related to coal lease agreements, sales agency commissions, farm income, and property and facility rentals. Royalty income generally results from the lease or sublease of mineral rights to third parties, with payments based upon a percentage of the selling price or an amount per ton of coal produced.


11


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounts Receivable
The timing of revenue recognition, billings and cash collections results in accounts receivable from customers. Customers are invoiced as coal is shipped or at periodic intervals in accordance with contractual terms. Invoices typically include customary adjustments for the resolution of price variability related to prior shipments, such as coal quality thresholds. Payments are generally received within thirty days of invoicing. Accounts receivable, net at March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Trade receivables, net
$
388.0

 
$
504.2

Miscellaneous receivables, net
136.0

 
47.9

Accounts receivable, net
$
524.0

 
$
552.1

Trade receivables, net presented above have been shown net of reserves of $0.5 million and $0.3 million as of March 31, 2018 and December 31, 2017, respectively. Miscellaneous receivables, net presented above have been shown net of reserves of $4.3 million as of both March 31, 2018 and December 31, 2017. Included in “Operating costs and expenses” in the unaudited condensed consolidated statements of operations was a charge for doubtful trade receivables of $0.2 million during the three months ended March 31, 2018. No charges for doubtful accounts were recognized during the three months ended March 31, 2017.
The Company also records long-term customer receivables related to the reimbursement of certain post-mining costs which are included within “Investments and other assets” in the accompanying condensed consolidated balance sheets. The balance of such receivables was $52.9 million and $139.3 million as of March 31, 2018 and December 31, 2017, respectively. The balance was adjusted in connection with the adoption of ASC 606, as described in Note 2. “Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented.” Also in connection with the adoption of ASC 606, the Company prospectively records a portion of the consideration received as “Interest income” rather than “Other revenues” in the accompanying unaudited condensed consolidated statements of operations, due to the embedded financing element within the related contract. Interest income related to these arrangements amounted to $2.1 million during the three months ended March 31, 2018.


12


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Disaggregation of Revenues
Revenue by product type and market is set forth in the following tables. With respect to its Australian Mining segments, the Company classifies as “Export” certain revenue from domestically-delivered coal under contracts in which the price is derived on a basis similar to export contracts.
 
Successor
 
Three Months Ended March 31, 2018
 
Powder River Basin Mining
 
Midwestern U.S. Mining
 
Western U.S. Mining
 
Australian Metallurgical Mining
 
Australian Thermal Mining
 
Trading and Brokerage
 
Corporate and Other
 
Consolidated
 
(Dollars in millions)
Thermal coal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
$
389.2

 
$
200.9

 
$
130.3

 
$

 
$
36.1

 
$

 
$

 
$
756.5

Export

 
0.7

 
8.0

 

 
164.9

 

 

 
173.6

Total thermal
389.2

 
201.6

 
138.3

 

 
201.0

 

 

 
930.1

Metallurgical coal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Export

 

 

 
465.3

 

 

 

 
465.3

Total metallurgical

 

 

 
465.3

 

 

 

 
465.3

Other
0.1

 
0.1

 
5.4

 
0.9

 
0.4

 
20.1

 
40.3

 
67.3

Total revenues
$
389.3

 
$
201.7

 
$
143.7

 
$
466.2

 
$
201.4

 
$
20.1

 
$
40.3

 
$
1,462.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
Three Months Ended March 31, 2017
 
Powder River Basin Mining
 
Midwestern U.S. Mining
 
Western U.S. Mining
 
Australian Metallurgical Mining
 
Australian Thermal Mining
 
Trading and Brokerage
 
Corporate and Other
 
Consolidated
 
(Dollars in millions)
Thermal coal
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Domestic
$
394.3

 
$
193.2

 
$
133.5

 
$

 
$
27.3

 
$

 
$

 
$
748.3

Export

 

 

 

 
197.2

 

 

 
197.2

Total thermal
394.3

 
193.2

 
133.5

 

 
224.5

 

 

 
945.5

Metallurgical coal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Export

 

 

 
324.6

 

 

 

 
324.6

Total metallurgical

 

 

 
324.6

 

 

 

 
324.6

Other

 

 
16.2

 
4.3

 
0.3

 
15.0

 
20.3

 
56.1

Total revenues
$
394.3

 
$
193.2

 
$
149.7

 
$
328.9

 
$
224.8

 
$
15.0

 
$
20.3

 
$
1,326.2



13


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue by contract duration was as follows:
 
Successor
 
Three Months Ended March 31, 2018
 
Powder River Basin Mining
 
Midwestern U.S. Mining
 
Western U.S. Mining
 
Australian Metallurgical Mining
 
Australian Thermal Mining
 
Trading and Brokerage
 
Corporate and Other
 
Consolidated
 
(Dollars in millions)
Long-term contracts
$
211.8

 
$
106.4

 
$
117.7

 
$
7.6

 
$
44.6

 
$

 
$

 
$
488.1

Short-term contracts
131.6

 
81.2

 
9.6

 
389.9

 
132.7

 

 

 
745.0

Spot
45.8

 
14.0

 
11.0

 
67.8

 
23.7

 

 

 
162.3

Other
0.1

 
0.1

 
5.4

 
0.9

 
0.4

 
20.1

 
40.3

 
67.3

Total revenues
$
389.3

 
$
201.7

 
$
143.7

 
$
466.2

 
$
201.4

 
$
20.1

 
$
40.3

 
$
1,462.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
Three Months Ended March 31, 2017
 
Powder River Basin Mining
 
Midwestern U.S. Mining
 
Western U.S. Mining
 
Australian Metallurgical Mining
 
Australian Thermal Mining
 
Trading and Brokerage
 
Corporate and Other
 
Consolidated
 
(Dollars in millions)
Long-term contracts
$
238.5

 
$
130.0

 
$
119.4

 
$
4.9

 
$
33.4

 
$

 
$

 
$
526.2

Short-term contracts
119.2

 
63.2

 
9.9

 
235.7

 
100.7

 

 

 
528.7

Spot
36.6

 

 
4.2

 
84.0

 
90.4

 

 

 
215.2

Other

 

 
16.2

 
4.3

 
0.3

 
15.0

 
20.3

 
56.1

Total revenues
$
394.3

 
$
193.2

 
$
149.7

 
$
328.9

 
$
224.8

 
$
15.0

 
$
20.3

 
$
1,326.2

Committed Revenue From Contracts With Customers
The Company expects to recognize revenue subsequent to March 31, 2018 of approximately $6.0 billion related to contracts with customers in which volumes and prices per ton were fixed or reasonably estimable at March 31, 2018. Approximately 50% of such amount is expected to be recognized over the next twelve months and the remainder thereafter. Actual revenue related to such contracts may differ materially for various reasons, including price adjustment features for coal quality and cost escalations, volume optionality provisions and potential force majeure events. This estimate of future revenue does not include any revenue related to contracts with variable prices per ton that cannot be reasonably estimated, such as the majority of Australian metallurgical and seaborne thermal coal contracts where pricing is negotiated or settled quarterly or annually.
(4)    Discontinued Operations
Discontinued operations include certain former Australian Thermal Mining and Midwestern U.S. Mining segment assets that have ceased production and other previously divested legacy operations, including Patriot Coal Corporation and certain of its wholly-owned subsidiaries (Patriot).
Summarized Results of Discontinued Operations
Results from discontinued operations were as follows during the periods presented below:
 
 
Successor
Predecessor
 
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
 
(Dollars in millions)
Loss from discontinued operations, net of income taxes
 
$
(1.3
)
$
(4.1
)


14


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Assets and Liabilities of Discontinued Operations
Assets and liabilities classified as discontinued operations included in the Company’s condensed consolidated balance sheets were as follows:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Assets:
 
 
 
Other current assets
$
0.6

 
$
0.3

Total assets classified as discontinued operations
$
0.6

 
$
0.3

 
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued expenses
$
70.7

 
$
70.6

Other noncurrent liabilities
170.6

 
170.0

Total liabilities classified as discontinued operations
$
241.3

 
$
240.6

Patriot-Related Matters
A significant portion of the liabilities in the table above relate to a former subsidiary, Patriot Coal Corporation. In 2012, Patriot filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Code. In 2013, the Company entered into a definitive settlement agreement (2013 Agreement) with Patriot and the United Mine Workers of America (UMWA), on behalf of itself, its represented Patriot employees and its represented Patriot retirees, to resolve all then disputed issues related to Patriot’s bankruptcy. In May 2015, Patriot again filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Code in the Eastern District of Virginia and subsequently initiated a process to sell some or all of its assets to qualified bidders. On October 9, 2015, Patriot’s bankruptcy court entered an order confirming Patriot’s plan of reorganization, which provided, among other things, for the sale of substantially all of Patriot’s assets to two different buyers.
Black Lung Occupational Disease Liabilities. Patriot had federal and state black lung occupational disease liabilities related to workers employed in periods prior to Patriot’s spin-off from the Company in 2007. Upon spin-off, Patriot indemnified the Company against any claim relating to these liabilities, which amounted to approximately $150 million at that time. The indemnification included any claim made by the U.S. Department of Labor (DOL) against the Company with respect to these obligations as a potentially liable operator under the Federal Coal Mine Health and Safety Act of 1969. The 2013 Agreement included Patriot’s affirmance of indemnities provided in the spin-off agreements, including the indemnity relating to such black lung liabilities; however, Patriot rejected this indemnity in its May 2015 bankruptcy.
By statute, the Company had secondary liability for the black lung liabilities related to Patriot’s workers employed by former subsidiaries of the Company. Whether the Company will ultimately be required to fund certain of those obligations in the future as a result of Patriot’s May 2015 bankruptcy remains uncertain. The amount of the liability was $134.9 million at March 31, 2018, which was determined on an actuarial basis based on the best information available to the Company. While the Company has recorded a liability, it intends to review each claim on a case-by-case basis and contest liability estimates as appropriate. The amount of the Company’s recorded liability reflects only Patriot workers employed by former subsidiaries of the Company that are presently retired, disabled or otherwise not actively employed. The Company cannot reliably estimate the potential liabilities for Patriot’s workers employed by former subsidiaries of the Company that are presently active in the workforce because of the potential for such workers to continue to work for another coal operator that is a going concern.
The Company’s accounting for the black lung liabilities related to Patriot is based on an interpretation of applicable statutes. Management believes that inconsistencies exist among the applicable statutes, regulations promulgated under those statutes and the DOL’s interpretative guidance. The Company may seek clarification from the DOL regarding these inconsistencies and the accounting for these liabilities could be reduced in the future depending on the DOL’s responses to inquiries.


15


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UMWA 1974 Pension Plan (UMWA Plan) Litigation. On July 16, 2015, a lawsuit was filed by the UMWA Plan, the UMWA 1974 Pension Trust (Trust) and the Trustees of the UMWA Plan and Trust (Trustees) in the United States District Court for the District of Columbia, against PEC, Peabody Holding Company, LLC, a subsidiary of the Company, and Arch Coal, Inc. The plaintiffs sought, pursuant to the Employee Retirement Income Security Act of 1974 (ERISA) and the Multiemployer Pension Plan Amendments Act of 1980, a declaratory judgment that the defendants were obligated to arbitrate any opposition to the Trustees’ determination that the defendants have statutory withdrawal liability as a result of the 2015 Patriot bankruptcy. After a legal and arbitration process and with the approval of the Bankruptcy Court, on January 25, 2017, the UMWA Plan and the Debtors agreed to a settlement of the claim whereby the UMWA Plan will be entitled to $75 million to be paid by the Company in increments through 2021. The balance of the liability, on a discounted basis, was $47.4 million at March 31, 2018.
(5)     Inventories
Inventories as of March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Materials and supplies
$
103.1

 
$
101.5

Raw coal
56.6

 
78.1

Saleable coal
105.8

 
111.7

Total
$
265.5

 
$
291.3

Materials and supplies inventories presented above have been shown net of reserves of $0.5 million and $0.6 million as of March 31, 2018 and December 31, 2017, respectively.
(6)     Derivatives and Fair Value Measurements
Risk Management — Corporate Hedging Activities
The Company is exposed to several risks in the normal course of business, including (1) foreign currency exchange rate risk for non-U.S. dollar expenditures and balances, (2) price risk on coal produced by and diesel fuel utilized in the Company’s mining operations and (3) interest rate risk that has been partially mitigated by fixed rates on long-term debt. The Company manages a portion of its price risk related to the sale of coal (excluding coal trading activities) using long-term coal supply agreements, rather than using derivative instruments. Derivative financial instruments have historically been used to manage the Company’s risk exposure to foreign currency exchange rate risk, primarily on Australian dollar expenditures made in its Australian mining platform. This risk was historically managed using forward contracts and options designated as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted foreign currency expenditures. The Company has also used derivative instruments to manage its exposure to the variability of diesel fuel prices used in production in the U.S. and Australia with swaps or options, which it has also designated as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted diesel fuel purchases. These risk management activities are collectively referred to as “Corporate Hedging” and are actively monitored for compliance with the Company’s risk management policies.
The Company had no diesel fuel derivatives in place as of March 31, 2018 or December 31, 2017. As of March 31, 2018, the Company had currency options outstanding with an aggregate notional amount of $1,125.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures during the remainder of 2018. The instruments are quarterly average rate options whereby the Company is entitled to receive payment on the notional amount should the quarterly average Australian dollar-to-U.S. dollar exchange rate exceed amounts ranging from $0.8150 to $0.82 over the remainder of 2018. The currency options are not expected to receive cash flow hedge accounting treatment and changes in fair value will be reflected in current earnings. The currency options’ fair value of $2.3 million and $4.2 million was included in “Other current assets” in the accompanying condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively.


16


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tables below show the classification and amounts of pre-tax gains and losses related to the Company’s Corporate Hedging derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
Three Months Ended March 31, 2018
Financial Instrument
 
Income Statement Classification of Losses
 
Total loss recognized in income
 
Loss realized in income on derivatives
 
Unrealized loss recognized in income on non-designated derivatives
 
 
 
(Dollars in millions)
Foreign currency option contracts
 
Operating costs and expenses
 
$
(4.2
)
 
$
(2.4
)
 
$
(1.8
)
Total
 
 
 
$
(4.2
)
 
$
(2.4
)
 
$
(1.8
)
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
 
 
Three Months Ended March 31, 2017
Financial Instrument
 
Income Statement Classification of Losses
 
Total loss recognized in income
 
Loss reclassified from other comprehensive loss into income
 
 
 
(Dollars in millions)
Commodity swap contracts
 
Operating costs and expenses
 
$
(11.0
)
 
$
(11.0
)
Foreign currency forward contracts
 
Operating costs and expenses
 
(16.6
)
 
(16.6
)
Total
 
 
 
$
(27.6
)
 
$
(27.6
)
Cash Flow Presentation. The Company classifies the cash effects of its Corporate Hedging derivatives within the “Cash Flows From Operating Activities” section of the accompanying unaudited condensed consolidated statements of cash flows.
Fair Value Measurements
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. These levels include: Level 1 - inputs are quoted prices in active markets for the identical assets or liabilities; Level 2 - inputs are other than quoted prices included in Level 1 that are directly or indirectly observable through market-corroborated inputs; and Level 3 - inputs are unobservable, or observable but cannot be market-corroborated, requiring the Company to make assumptions about pricing by market participants.
Financial Instruments Measured on a Recurring Basis. The following tables set forth the hierarchy of the Company’s net financial asset positions for which fair value is measured on a recurring basis:
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Foreign currency contracts
$

 
$
2.3

 
$

 
$
2.3

Total net financial assets
$

 
$
2.3

 
$

 
$
2.3

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Foreign currency contracts
$

 
$
4.2

 
$

 
$
4.2

Total net financial assets
$

 
$
4.2

 
$

 
$
4.2

For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including interest rate yield curves, exchange indices, broker/dealer quotes, published indices, issuer spreads, benchmark securities and other market quotes. In the case of certain debt securities, fair value is provided by a third-party pricing service. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:
Foreign currency forward and option contracts: valued utilizing inputs obtained in quoted public markets (Level 2) except when credit and non-performance risk is considered to be a significant input, then the Company classifies such contracts as Level 3.


17


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Financial Instruments. The Company used the following methods and assumptions in estimating fair values for other financial instruments as of March 31, 2018 and December 31, 2017:
Cash and cash equivalents, restricted cash, accounts receivable, including those within the Company’s accounts receivable securitization program, notes receivable and accounts payable have carrying values which approximate fair value due to the short maturity or the liquid nature of these instruments.
Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2), and otherwise on estimated borrowing rates to discount the cash flows to their present value (Level 3).
The carrying amounts and estimated fair values of the Company’s current and long-term debt as of March 31, 2018 and December 31, 2017 are summarized as follows:
 
March 31, 2018
 
December 31, 2017
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(Dollars in millions)
Current and Long-term debt
$
1,455.2

 
$
1,535.6

 
$
1,460.8

 
$
1,547.4

The Company had no transfers between fair value hierarchy levels for either financial instruments measured on a recurring basis or other financial instruments during the three months ended March 31, 2018 and 2017. The Company’s policy is to value all transfers between levels using the beginning of period valuation.
(7)     Coal Trading
The Company engages in the direct and brokered trading of coal and freight-related contracts (coal trading). Except those contracts for which the Company has elected to apply a normal purchases and normal sales exception, all derivative coal trading contracts are accounted for at fair value. Coal brokering is conducted both as principal and agent in support of various coal production-related activities that may involve coal produced from the Company's mines, coal sourcing arrangements with third-party mining companies or offtake agreements with other coal producers. The Company’s Trading and Brokerage segment also provides transportation-related services, which involve both financial derivative contracts and physical contracts. Collectively, coal and freight-related hedging activities include both economic hedging and, from time to time, cash flow hedging in support of the Company's coal trading strategy.
The Company includes instruments associated with coal trading transactions as a part of its trading book. Trading revenues from such transactions are recorded in “Other revenues” in the unaudited condensed consolidated statements of operations and include realized and unrealized gains and losses on derivative instruments, including those that arise from coal deliveries related to contracts accounted for on an accrual basis under the normal purchases and normal sales exception. Therefore, the Company has elected the trading exemption surrounding disclosure of its coal trading activities.
Trading revenues (losses) recognized during the periods presented below were as follows:
 
 
Successor
Predecessor
Trading Revenues by Type of Instrument
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
 
(Dollars in millions)
Futures, swaps and options
 
$
(16.9
)
$
(10.2
)
Physical purchase/sale contracts
 
37.0

25.2

Total trading revenues
 
$
20.1

$
15.0



18


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Offsetting and Balance Sheet Presentation
The Company’s coal trading assets and liabilities include financial instruments, such as swaps, futures and options, cleared through various exchanges, which involve the daily net settlement of open positions. The Company must post cash collateral in the form of initial margin, in addition to variation margin, on exchange-cleared positions that are in a net liability position and receives variation margin when in a net asset position. The Company also transacts in coal trading financial swaps and options through over-the-counter (OTC) markets with financial institutions and other non-financial trading entities under International Swaps and Derivatives Association Master Agreements, which contain symmetrical default provisions. Certain of the Company’s coal trading agreements with OTC counterparties also contain credit support provisions that may periodically require the Company to post, or entitle the Company to receive, variation margin. Physical coal and freight-related purchase and sale contracts included in the Company’s coal trading assets and liabilities are executed pursuant to master purchase and sale agreements that also contain symmetrical default provisions and allow for the netting and setoff of receivables and payables that arise during the same time period. The Company offsets its coal trading asset and liability derivative positions, and variation margin related to those positions, on a counterparty-by-counterparty basis in the condensed consolidated balance sheets, with the fair values of those respective derivatives reflected in “Assets from coal trading activities, net” and “Liabilities from coal trading activities, net.”
The fair value of assets and liabilities from coal trading activities presented on a gross and net basis as of March 31, 2018 and December 31, 2017 is set forth below:
Affected Line Item in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Variation Margin Posted (1)
 
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets
 
 
(Dollars in millions)
 
 
Fair Value as of March 31, 2018
Assets from coal trading activities, net
 
$
53.6

 
$
(42.4
)
 
$

 
$
11.2

Liabilities from coal trading activities, net
 
(57.9
)
 
42.4

 
6.7

 
(8.8
)
Total, net
 
$
(4.3
)
 
$

 
$
6.7

 
$
2.4

 
 
 
 
 
 
 
 
 
 
 
Fair Value as of December 31, 2017
Assets from coal trading activities, net
 
$
77.1

 
$
(74.5
)
 
$

 
$
2.6

Liabilities from coal trading activities, net
 
(122.0
)
 
74.5

 
35.8

 
(11.7
)
Total, net
 
$
(44.9
)
 
$

 
$
35.8

 
$
(9.1
)
(1) 
None of the net variation margin posted at March 31, 2018 and December 31, 2017 related to cash flow hedges.
Fair Value Measurements
The following tables set forth the hierarchy of the Company’s net financial asset (liability) coal trading positions for which fair value is measured on a recurring basis as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Futures, swaps and options
$
0.2

 
$

 
$

 
$
0.2

Physical purchase/sale contracts

 
2.2

 

 
2.2

Total net financial assets
$
0.2

 
$
2.2

 
$

 
$
2.4

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Futures, swaps and options
$
(3.0
)
 
$
(4.2
)
 
$

 
$
(7.2
)
Physical purchase/sale contracts

 
(1.9
)
 

 
(1.9
)
Total net financial liabilities
$
(3.0
)
 
$
(6.1
)
 
$

 
$
(9.1
)


19


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including U.S. interest rate curves; LIBOR yield curves; Chicago Mercantile Exchange Group, Intercontinental Exchange, Baltic Exchange and Singapore Exchange contract prices; broker quotes; published indices; and other market quotes. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:
Futures, swaps and options: generally valued based on unadjusted quoted prices in active markets (Level 1) or a valuation that is corroborated by the use of market-based pricing (Level 2) except when credit and non-performance risk is considered to be a significant input (greater than 10% of fair value), then the Company classifies as Level 3.
Physical purchase/sale contracts: purchases and sales at locations with significant market activity corroborated by market-based information (Level 2) except when credit and non-performance risk is considered to be a significant input (greater than 10% of fair value), then the Company classifies as Level 3.
As of March 31, 2018, the timing of the estimated future realization of the value of the Company’s trading portfolio was as follows:
 
 
Percentage of
Year of Expiration
 
Portfolio Total
2018
 
83
 %
2019
 
25
 %
2020
 
(8
)%
 
 
100
 %
Credit and Non-performance Risk. The fair value of the Company’s coal derivative assets and liabilities reflects adjustments for credit risk. The Company’s exposure is substantially with electric utilities, energy marketers, steel producers and nonfinancial trading houses. The Company’s policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to regularly monitor the credit extended. If the Company engages in a transaction with a counterparty that does not meet its credit standards, the Company seeks to protect its position by requiring the counterparty to provide an appropriate credit enhancement. Also, when appropriate (as determined by its credit management function), the Company has taken steps to reduce its exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk of failure to perform under their contractual obligations. These steps include obtaining letters of credit or cash collateral (margin), requiring prepayments for shipments or the creation of customer trust accounts held for the Company’s benefit to serve as collateral in the event of a failure to pay or perform. To reduce its credit exposure related to trading and brokerage activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset asset and liability positions with such counterparties and, to the extent required, the Company will post or receive margin amounts associated with exchange-cleared and certain OTC positions. The Company also continually monitors counterparty and contract non-performance risk, if present, on a case-by-case basis.
At March 31, 2018, 55% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties, while 1% was with non-investment grade counterparties and 44% was with counterparties that are not rated.
Performance Assurances and Collateral
The Company is required to post variation margin on positions that are in a net liability position and is entitled to receive and hold variation margin on positions that are in a net asset position with an exchange and certain of its OTC derivative contract counterparties. At March 31, 2018 and December 31, 2017, the Company posted a net variation margin of $6.7 million and $35.8 million, respectively.
In addition to the requirements surrounding variation margin, the Company is required by the exchanges upon which it transacts to post certain additional collateral, known as initial margin, which represents an estimate of potential future adverse price movements across the Company’s portfolio under normal market conditions. The Company posted initial margin of $18.5 million as of March 31, 2018, compared to $18.8 million as of December 31, 2017, which is reflected in “Other current assets” in the condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, the Company was in receipt of $4.6 million and $1.8 million, respectively, of the required variation and initial margin.


20


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Certain of the Company’s derivative trading instruments require the parties to provide additional performance assurances whenever a material adverse event jeopardizes one party’s ability to perform under the instrument. If the Company was to sustain a material adverse event (using commercially reasonable standards), its counterparties could request collateralization on derivative trading instruments in net liability positions which, based on an aggregate fair value at March 31, 2018 and December 31, 2017, would have amounted to collateral postings to counterparties of approximately $1.1 million and $7.0 million, respectively. As of March 31, 2018, the Company was not required to post collateral, whereas on December 31, 2017, the Company was required to post approximately $0.4 million in collateral to counterparties for such positions
Certain of the Company’s other derivative trading instruments require the parties to provide additional performance assurances whenever a credit downgrade occurs below a certain level, as specified in each underlying contract. The terms of such derivative trading instruments typically require additional collateralization, which is commensurate with the severity of the credit downgrade. During the first quarter of 2018, one major rating agency upgraded the Company’s corporate credit rating, thus improving the Company’s credit position with its counterparties. The Company’s collateral requirement owed to its counterparties for these ratings based derivative trading instruments for March 31, 2018 remained at zero, consistent with December 31, 2017. As of March 31, 2018 and December 31, 2017, no collateral was posted to counterparties to support such derivative trading instruments.
(8)     Intangible Contract Assets and Liabilities
At the Effective Date, the Company recorded intangible assets of $314.9 million and liabilities of $58.7 million to reflect the inherent fair value of certain U.S. coal supply agreements as a result of favorable and unfavorable differences between contract terms and estimated market terms for the same coal products, and also recorded intangible liabilities of $116.2 million related to unutilized capacity under its port and rail take-or-pay contracts. The balances and respective balance sheet classifications of such assets and liabilities at March 31, 2018 and December 31, 2017, net of accumulated amortization, are set forth in the following tables:
 
March 31, 2018
 
(Dollars in millions)
 
Assets
 
Liabilities
 
Net Total
Coal supply agreements
$
143.8

 
$
(38.6
)
 
$
105.2

Take-or-pay contracts

 
(81.1
)
 
(81.1
)
Total
$
143.8

 
$
(119.7
)
 
$
24.1

 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
Investments and other assets
$
143.8

 
$

 
$
143.8

Accounts payable and accrued expenses

 
(25.1
)
 
(25.1
)
Other noncurrent liabilities

 
(94.6
)
 
(94.6
)
Total
$
143.8

 
$
(119.7
)
 
$
24.1

 
 
 
 
 
 
 
December 31, 2017
 
(Dollars in millions)
 
Assets
 
Liabilities
 
Net Total
Coal supply agreements
$
177.2

 
$
(42.7
)
 
$
134.5

Take-or-pay contracts

 
(90.7
)
 
(90.7
)
Total
$
177.2

 
$
(133.4
)
 
$
43.8

 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
Investments and other assets
$
177.2

 
$

 
$
177.2

Accounts payable and accrued expenses

 
(27.6
)
 
(27.6
)
Other noncurrent liabilities

 
(105.8
)
 
(105.8
)
Total
$
177.2

 
$
(133.4
)
 
$
43.8



21


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amortization of the intangible assets and liabilities related to coal supply agreements occurs ratably based upon coal volumes shipped per contract and is recorded as a component of “Depreciation, depletion and amortization” in the accompanying condensed consolidated statements of operations. Such amortization amounted to $29.3 million during the three months ended March 31, 2018. The Company anticipates net amortization of sales contracts, based upon expected shipments in the next five years, to be an expense of approximately $68 million during the nine months ended December 31, 2018, and for the years 2019 through 2022, expense of approximately $27 million, $8 million, $3 million, and $1 million, respectively.
Future unutilized capacity and the amortization periods related to the take-or-pay contract intangible liabilities are based upon estimates of forecasted usage. Such amortization, which is classified as a reduction to “Operating costs and expenses” in the accompanying condensed consolidated statements of operations, amounted to $8.3 million during the three months ended March 31, 2018. The Company anticipates net amortization of take-or-pay contract intangible liabilities to be approximately $19 million during the nine months ended December 31, 2018, and for the years 2019 through 2022, approximately $18 million, $9 million, $4 million, and $3 million, respectively.
(9) Equity Method Investments
The Company had total equity method investments of $72.3 million and $83.8 million reflected in “Investments and other assets” in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively, related to Middlemount Coal Pty Ltd (Middlemount). As noted in Note 2. “Emergence from the Chapter 11 Cases and Fresh Start Reporting” in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, the carrying value of the equity method investments and financing receivables was adjusted to fair value in connection with fresh start reporting based on the net present value of future cash flows associated with the Company’s 50% equity interest in Middlemount.
The Company received cash payments from Middlemount of $35.8 million and $31.0 million during the three months ended March 31, 2018 and 2017, respectively.
(10) Property, Plant, Equipment and Mine Development
The composition of property, plant, equipment and mine development, net, as of March 31, 2018 and December 31, 2017 is set forth in the table below. Refer to Note 2. “Emergence from the Chapter 11 Cases and Fresh Start Reporting” in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for details regarding the impact of fresh start reporting on property, plant, equipment and mine development.
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Land and coal interests
$
3,891.7

 
$
3,890.5

Buildings and improvements
452.3

 
470.6

Machinery and equipment
1,195.1

 
1,149.3

Less: Accumulated depreciation, depletion and amortization
(531.1
)
 
(398.5
)
Property, plant, equipment and mine development, net
$
5,008.0

 
$
5,111.9

(11Income Taxes
The Company’s effective tax rate before remeasurement for the three months ended March 31, 2018 is based on the Company’s estimated full year effective tax rate, comprised of expected statutory tax benefit, offset by foreign rate differential and changes in valuation allowance. The Company’s income tax provision of $10.1 million and $2.2 million for the three months ended March 31, 2018 and 2017, respectively, included tax provisions of $0.5 million and $9.4 million, respectively, related to the remeasurement of foreign income tax accounts.


22


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law making significant changes to the Internal Revenue Code. Certain provisions of the Act applied to taxable years beginning after December 31, 2017 and therefore have an impact on the three months ended March 31, 2018. The Company has determined that a significant portion of the provisions will not have a material impact. The Company is continuing to gather additional information and anticipates completing the analysis for the following item by December 31, 2018:
Global Intangible Low-Taxed Income (GILTI): The Act subjects a U.S. shareholder to current tax on GILTI of its controlled foreign corporations (CFCs) for taxable years beginning after December 31, 2017. GILTI is calculated as the excess of a U.S. shareholder’s pro-rata share of net income of CFCs over a calculated return on specific tangible assets of the CFCs. The GILTI will be offset by net operating losses in the U.S. and a corresponding valuation allowance release and will not impact the effective tax rate. The Company has elected to account for GILTI as a period charge in the period the tax arises.
The Company has not completed its assessment for the income tax effects of the Act related to the repeal of the corporate alternative minimum tax system, remeasurement of deferred tax assets and liabilities and elimination of executive compensation exemptions. However, as noted in Note 11. “Income Taxes” in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, the Company was able to reasonably estimate certain effects for these items and therefore recorded provisional adjustments. The Company has not made any additional measurement-period adjustments related to these items during the three months ended March 31, 2018. The Company is continuing to gather additional information and anticipates completing the analysis for these items by December 22, 2018, within the one-year measurement period.
(12)     Long-term Debt 
In accordance with the Plan, the Company was recapitalized with new debt and equity instruments, including the 6.000% Senior Secured Notes due March 2022, the 6.375% Senior Secured Notes due March 2025, and the Senior Secured Term Loan due 2025 in the table below. The Company’s total indebtedness as of March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
6.000% Senior Secured Notes due March 2022
$
500.0

 
$
500.0

6.375% Senior Secured Notes due March 2025
500.0

 
500.0

Senior Secured Term Loan due 2025
444.3

 
444.2

Capital lease and other obligations
67.8

 
76.0

Less: Debt issuance costs
(56.9
)
 
(59.4
)
 
1,455.2

 
1,460.8

Less: Current portion of long-term debt
87.1

 
42.1

Long-term debt
$
1,368.1

 
$
1,418.7

In connection with the Chapter 11 Cases, the Company was required to pay adequate protection payments of $29.8 million to certain first lien creditors of the Predecessor company during the three months ended March 31, 2017. The adequate protection payments were recorded as “Interest expense” in the unaudited condensed consolidated statements of operations and ceased upon the Effective Date. The Company did not record interest expense subsequent to the filing of the Bankruptcy Petitions for the majority non-first lien Predecessor indebtedness, which was automatically stayed in accordance with Section 502(b)(2) of the Bankruptcy Code. The amount of contractual interest stayed was $92.9 million for the period January 1, 2017 through the Effective Date.
6.000% and 6.375% Senior Secured Notes
On February 15, 2017, one of PEC’s subsidiaries entered into an indenture (the Indenture) with Wilmington Trust, National Association, as trustee, relating to the issuance by PEC’s subsidiary of $500.0 million aggregate principal amount of 6.000% senior secured notes due 2022 (the 2022 Notes) and $500.0 million aggregate principal amount of 6.375% senior secured notes due 2025 (the 2025 Notes and, together with the 2022 Notes, the Senior Notes). The Senior Notes were sold on February 15, 2017 in a private transaction exempt from the registration requirements of the Securities Act of 1933. The proceeds from the Senior Notes were used to repay the Predecessor company first lien obligations.


23


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Senior Notes were issued at par value. The Company paid aggregate debt issuance costs of $49.5 million related to the offering, which will be amortized over the respective terms of the Senior Notes. Interest payments on the Senior Notes are scheduled to occur each year on March 31st and September 30th until maturity. During the three months ended March 31, 2018, the Company recorded interest expense of $17.5 million related to the Senior Notes.
The Company may redeem the 2022 Notes, in whole or in part, beginning in 2019 at 103.0% of par, in 2020 at 101.5% of par, and in 2021 and thereafter at par. The 2025 Notes may be redeemed, in whole or in part, beginning in 2020 at 104.8% of par, in 2021 at 103.2% of par, in 2022 at 101.6% of par, and in 2023 and thereafter at par. In addition, prior to the first date on which the Senior Notes are redeemable at the redemption prices noted above, the Company may also redeem some or all of the Senior Notes at a calculated make-whole premium, plus accrued and unpaid interest.
The Indenture contains customary conditions of default and imposes certain restrictions on the Company’s activities, including its ability to incur liens, incur debt, make investments, engage in fundamental changes such as mergers and dissolutions, dispose of assets, enter into transactions with affiliates, and make certain restricted payments, such as cash dividends and share repurchases.
The Senior Notes rank senior in right of payment to any subordinated indebtedness and equally in right of payment with any senior indebtedness to the extent of the collateral securing that indebtedness. The Senior Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of the Company’s material domestic subsidiaries and secured by first priority liens over (1) substantially all of the assets of the Company and the guarantors, except for certain excluded assets, (2) 100% of the capital stock of each domestic restricted subsidiary of the Company, (3) 100% of the non-voting capital stock of each first tier foreign subsidiary of the Company or a foreign subsidiary holding company and no more than 65% of the voting capital stock of each first tier foreign subsidiary of the Company or a foreign subsidiary holding company, (4) a legal charge of 65% of the voting capital stock and 100% of the non-voting capital stock of Peabody Investments (Gibraltar) Limited and (5) all intercompany debt owed to the Company or any guarantor, in each case, subject to certain exceptions. The obligations under the Senior Notes are secured on a pari passu basis by the same collateral securing the Credit Agreement (as defined below), subject to certain exceptions.
Credit Agreement
In connection with an exit facility commitment letter, on the Effective Date, the Company entered into a credit agreement, dated as of April 3, 2017, among the Company, as Borrower, Goldman Sachs Bank USA, as Administrative Agent, and other lenders party thereto (the Credit Agreement). The Credit Agreement originally provided for a $950.0 million senior secured term loan (the Senior Secured Term Loan), which was to mature in 2022 prior to the amendments described below. The proceeds from the Senior Secured Term Loan were used to repay the Predecessor company first lien obligations.
Following the voluntary prepayments described below, the Credit Agreement provided for a $450.0 million first lien senior secured term loan, which bore interest at LIBOR plus 3.50% per annum with a 1.00% LIBOR floor as of March 31, 2018. During the three months ended March 31, 2018, the Company recorded interest expense of $6.6 million related to the Senior Secured Term Loan.
Proceeds from the Senior Secured Term Loan were received net of an original issue discount and deferred financing costs of $37.3 million that will be amortized over its term. The loan principal is payable in quarterly installments plus accrued interest through December 2024 with the remaining balance due in March 2025. The loan principal is voluntarily prepayable at 101% of the principal amount repaid if voluntarily prepaid prior to October 2018 (subject to certain exceptions, including prepayments made with internally generated cash) and is voluntarily prepayable at any time thereafter without premium or penalty. The Senior Secured Term Loan may require mandatory principal prepayments of 75% of Excess Cash Flow (as defined in the Credit Agreement) for any fiscal year (commencing with the fiscal year ending December 31, 2018). The mandatory principal prepayment requirement changes to (i) 50% of Excess Cash Flow if the Company’s Total Leverage Ratio (as defined in the Credit Agreement and calculated as of December 31) is less than or equal to 2.00:1.00 and greater than 1.50:1.00, (ii) 25% of Excess Cash Flow if the Company’s Total Leverage Ratio is less than or equal to 1.50:1.00 and greater than 1.00:1.00, or (iii) zero if the Company’s Total Leverage Ratio is less than or equal to 1.00:1.00. If required, mandatory prepayments resulting from Excess Cash Flows are payable within 100 days after the end of each fiscal year. In certain circumstances, the Senior Secured Term Loan also requires that Excess Proceeds (as defined in the Credit Agreement) of $10.0 million or greater from sales of Company assets be applied against the loan principal, unless such proceeds are reinvested within one year.


24


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Credit Agreement contains customary conditions of default and imposes certain restrictions on the Company’s activities, including its ability to incur liens, incur debt, make investments, engage in fundamental changes such as mergers and dissolutions, dispose of assets, enter into transactions with affiliates, and make certain restricted payments, such as cash dividends and share repurchases. Obligations under the Credit Agreement are secured on a pari passu basis by the same collateral securing the Senior Notes.
The Company voluntarily prepaid $500.0 million of the original $950.0 million loan principal amount on the Senior Secured Term Loan in $150.0 million installments on July 31, 2017 and September 11, 2017 and a $200.0 million installment on December 29, 2017. On September 18, 2017, the Company entered into an amendment to the Credit Agreement which lowered the interest rate from LIBOR plus 4.50% per annum with a 1.00% LIBOR floor to LIBOR plus 3.50% per annum with a 1.00% LIBOR floor. The amendment permitted the Company to add an incremental revolving credit facility in addition to the Company’s ability to add one or more incremental term loan facilities under the Credit Agreement. The incremental revolving credit facility and/or incremental term loan facilities can be in an aggregate principal amount of up to $350.0 million plus additional amounts so long as the Company is below Total Leverage Ratio requirements as set forth in the Credit Agreement. The amendment also made available an additional restricted payment basket that permits additional repurchases, dividends or other distributions with respect to the Company’s Common and Preferred Stock in an aggregate amount up to $450.0 million so long as the Company’s Fixed Charge Coverage Ratio (as defined in the Credit Agreement) would not exceed 2.00:1.00 on a pro forma basis.
During the fourth quarter of 2017, the Company entered into the incremental revolving credit facility (the Revolver) for an aggregate commitment of $350.0 million for general corporate purposes. The Company paid aggregate debt issuance costs of $4.7 million. The Revolver matures in November 2020 and permits loans which bear interest at LIBOR plus 3.25%. The Revolver is subject to a 2.00:1.00 Total Leverage Ratio requirement, modified to limit unrestricted cash netting to $800.0 million. Capacity under the Revolver may also be utilized for letters of credit which incur combined fees of 3.375% per annum. Unused capacity under the Revolver bears a commitment fee of 0.5% per annum. As of March 31, 2018, the Revolver has only been utilized for letters of credit amounting to $163.1 million. Such letters of credit were primarily in support of the Company’s reclamation obligations, as further described in Note 17. “Financial Instruments and Other Guarantees.” During the three months ended March 31, 2018, the Company recorded interest expense and fees of $1.8 million related to the Revolver.
On April 11, 2018, the Company entered into another amendment to the Credit Agreement which further lowered the interest rate on the Senior Secured Term Loan to LIBOR plus 2.75% and eliminated the LIBOR floor. The amendment also extends the maturity of the Senior Secured Term Loan by three years to 2025 and eliminates previous capital expenditure restriction covenants on both the Senior Secured Term Loan and the Revolver. In connection with this amendment, the Company incurred customary fees of approximately $2.0 million and repaid additional principal of $46.0 million which is reflected within “Current portion of long-term debt” in the accompany condensed consolidated balance sheets at March 31, 2018.
Restricted Payments Under the Senior Notes and Credit Agreement
In addition to the $450.0 million restricted payment basket provided for under the September 18, 2017 amendment, the Credit Agreement provides a builder basket for additional restricted payments subject to a maximum Total Leverage Ratio of 2.00:1.00 (as defined in the Credit Agreement).
The Indenture provides a builder basket for restricted payments that is calculated based upon the Company’s Consolidated Net Income, and is subject to a Fixed Charge Coverage Ratio of at least 2.25:1.00 (as defined in the Indenture).
Under both the Indenture and Credit Agreement, additional restricted payments are permitted through a $50.0 million general basket and an annual aggregate $25.0 million basket which allows dividends and Common Stock repurchases. The payment of dividends and purchases of Common Stock under this latter basket are permitted so long as the Company’s Total Leverage Ratio would not exceed 1.25:1.00 on a pro forma basis (as defined in the Credit Agreement and Indenture).
Copies of the Indenture documents are incorporated as Exhibit 4.3 to the Current Report on Form 8-K filed by the Company with the SEC on April 3, 2017. A copy of the Credit Agreement is included as Exhibit 10.3 to the Current Report on Form 8-K filed by the Company with the SEC on April 3, 2017, and copies of the subsequent amendments are included as Exhibit 10.1 to the Current Reports on Form 8-K filed by the Company with the SEC on September 18, 2017, November 20, 2017, December 19, 2017 and April 11, 2018, respectively.



25


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(13Pension and Postretirement Benefit Costs
The components of net periodic pension and postretirement benefit costs, excluding the service cost for benefits earned, are included in “Net periodic benefit costs, excluding service cost” in the unaudited condensed consolidated statements of operations.
Net periodic pension (benefit) cost included the following components:
 
 
Successor
Predecessor
 
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
 
(Dollars in millions)
Service cost for benefits earned
 
$
0.6

$
0.6

Interest cost on projected benefit obligation
 
7.8

9.7

Expected return on plan assets
 
(10.7
)
(11.0
)
Amortization of prior service cost and net actuarial loss
 

6.4

Net periodic pension (benefit) cost
 
$
(2.3
)
$
5.7

Annual contributions to the qualified plans are made in accordance with minimum funding standards and the Company’s agreement with the Pension Benefit Guaranty Corporation. Funding decisions also consider certain funded status thresholds defined by the Pension Protection Act of 2006 (generally 80%). As of March 31, 2018, the Company’s qualified plans were expected to be at or above the Pension Protection Act thresholds. Prior to emergence from the Chapter 11 Cases, the Company incurred pension costs for two non-qualified pension plans which it no longer sponsors. Minimum funding standards are legislated by ERISA and are modified by pension funding stabilization provisions included in the Moving Ahead for Progress in the 21st Century Act of 2012, the Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015. Based upon minimum funding requirements, the Company is not required to make any contributions to its qualified pension plans in 2018; however, during the three months ended March 31, 2018, the Company made a discretionary contribution of $30.0 million to one of its qualified pension plans.
Net periodic postretirement benefit cost included the following components:
 
 
Successor
Predecessor
 
 
Three Months Ended March 31, 2018
Three Months Ended March 31, 2017
 
 
(Dollars in millions)
Service cost for benefits earned
 
$
2.0

$
2.3

Interest cost on accumulated postretirement benefit obligation
 
7.1

8.4

Amortization of prior service cost and net actuarial loss
 

3.2

Net periodic postretirement benefit cost
 
$
9.1

$
13.9

(14Accumulated Other Comprehensive Income
The following table sets forth the after-tax components of accumulated other comprehensive income and changes thereto recorded during the three months ended March 31, 2018:
 
 
Foreign Currency Translation
Adjustment
 
Total Accumulated Other Comprehensive Income
 
 
(Dollars in millions)
 
December 31, 2017
$
1.4

 
$
1.4

 
Current period change
(0.8
)
 
(0.8
)
 
March 31, 2018
$
0.6

 
$
0.6



26


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of accumulated other comprehensive income (loss) related to postretirement plans and workers’ compensation obligations and cash flow hedges related to Predecessor periods were eliminated in accordance with fresh start reporting as described in Note 2. “Emergence from the Chapter 11 Cases and Fresh Start Reporting” in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The following table provides additional information regarding items reclassified out of “Accumulated other comprehensive income (loss)” into earnings during the period presented below:
 
 
Amount reclassified from accumulated other comprehensive income (loss) (1)
 
 
 
 
Predecessor
 
 
Details about accumulated other comprehensive income (loss) components

 
Three Months Ended March 31, 2017
 
Affected line item in the unaudited condensed consolidated statement of operations
 
 
(Dollars in millions)
 
 
Net actuarial loss associated with postretirement plans and workers’ compensation obligations:
 
 
 
 
Postretirement health care and life insurance benefits
 
$
(5.5
)
 
Net periodic benefit costs, excluding service cost
Defined benefit pension plans
 
(6.3
)
 
Net periodic benefit costs, excluding service cost
Insignificant items
 
2.7

 
 
 
 
(9.1
)
 
Total before income taxes
 
 
3.3

 
Income tax benefit
 
 
$
(5.8
)
 
Total after income taxes
 
 
 
 
 
Prior service credit associated with postretirement plans:
 
 
 
 
Postretirement health care and life insurance benefits
 
$
2.3

 
Net periodic benefit costs, excluding service cost
Defined benefit pension plans
 
(0.1
)
 
Net periodic benefit costs, excluding service cost
 
 
2.2

 
Total before income taxes
 
 
(0.8
)
 
Income tax provision
 
 
$
1.4

 
Total after income taxes